ACI Worldwide, Inc. (ACIW) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Beth, and I will be your conference operator. At this time, I would like to welcome everyone to the ACI Worldwide Report First Quarter Earnings Conference Call. [Operator Instructions] John Kraft, Vice President of Investor Relations and Strategy, you may begin your conference.

Thank you, Beth. Good morning, everybody. Today's call, like all of our events, is subject to both Safe Harbor and forward-looking statements. You can find the full text of both statements on our first and final pages of our presentation deck today, a copy of which is available on our website as well as with the SEC. On this morning's call is Phil Heasley, our CEO; and Scott Behrens, our CFO. And before I turn call over to Phil, I did want to mention that ACI will be participating at conferences in the coming weeks, including the Craig-Hallum Conference on May 29; and the Stephens conference, June 4 and 5. If you are interested in a one-on-one, please contact the conference organizers directly. With that, I'd like to turn the call over to Philip Heasley, ACI's Chief Executive Officer. Phil?

Good morning and thank you for joining our call. Starting on Slide 4, we were very busy in Q1. We completed the Online Resources acquisition on March 11 and have been aggressively working on integration. Everything is tracking as planned, and we're hearing great things about the Online Resources transaction in the marketplace. We are substantially complete with the efforts to generate $19.5 million in annual cost savings. Furthermore, we expect to generate additional cost savings as we consolidate data center facilities and IT infrastructure. We were able to integrate S1 faster and achieve better synergies than originally expected, and we're confident about our prospects with Online Resources. Under ACI ownership, we expect to stabilize ORCC's banking business and allow its biller direct business to continue its impressive growth. The acquisition adds roughly $660 million to our 60-month backlog. And importantly, the ORCC business is nearly all recurring revenue, which will add to our financial visibility and our predictability. For the first time, we are providing specific revenue phasing guidance. We have not historically given guidance by quarter or half year. ACI is a seasonal business, and we now feel it's important to detail the differences between the first and second half of the year. Scott will describe this in more detail in the financial section. For the full year 2013, we now expect to deliver revenue in the range of $895 million to $915 million, up $130 million from our prior guidance of $765 million to $785 million. This is due to the contribution of Online Resources. Our strong pipeline and our visibility into the timing of implementations provide us comfort with this full year guidance. Turning to new sales bookings in quarter 1. ACI generated new sales bookings, net of term extensions, up $71 million or 19% improvement from last year, or this would be 10% excluding Online Resources. This is a solid number for quarter 1, and is typically our softest selling quarter of the year. Lastly, but certainly not least, we are very excited with the launch and official rollout of our new Universal Payments Platform. For the past 3 years, we've been working hard to realize our vision to deliver the most complete end-to-end payment solutions for financial institutions, processors and retailers. UPP is based on a unique orchestration layer of software that seamlessly and easily integrates all our products and solutions. UPP enables customers to adopt an enterprise-wide payment strategy and provides them with a multitude of business benefits, including reduced operating and maintenance costs and greater flexibility in new products and revenue streams. Having recently returned from our European user group conference and the NACHA conference, I am pleased with the feedback we're hearing from our customers regarding the business value that UPP can deliver. In summary, we are excited and confident about the remainder of 2013, our ability to provide increased value to our customers and growth to our investors has never been better. I will now hand the call over to Scott to discuss our financial results for the quarter, as well as our guidance for the remainder of 2013.

Thanks, Phil, and good morning, everyone. I first plan to go through the highlights of our first quarter and then provide an update on our outlook for 2013. And we'll then open up the line for questions. So I'll be starting my comments on Slide 6, with key takeaways from the quarter. As you are already aware, we closed the acquisition of Online Resources on March 11. So consequently, 20 days of the company's operations contributed to our results for the first quarter. As we told you on our last call, we expected to achieve $19.5 million in synergy-related cost reductions. Those cost reductions are now substantially complete, which will provide us with more than 7 months of savings or approximately $12 million in cost savings in 2013. Additionally, we expect to achieve further cost synergies beyond this amount, with those coming from data center and facilities consolidation. We continue to assess those additional cost savings and expect to be able provide the timing and financial impact of those actions later on in the year. As Phil mentioned, we saw strong growth in new sales bookings, net of term extensions, with the consolidated new sales bookings growth of 19%, or 10% excluding the contribution from Online Resources. Turning next to backlog. The acquisition of Online Resources was a major contributor to boosting our 60-month backlog above the $3 billion mark for the first time ever. So obviously a significant milestone for us. Our 12-month backlog grew $154 million after adjusting for FX to $743 million, of which $138 million was due to the contribution of Online Resources. We also saw a strong growth in operating free cash flow, which grew to $34 million, up from $4 million this time last year. Turning next to Slide 7. The inclusion of a partial quarter of Online Resources and now a full quarter of S1 versus a partial quarter in 2012 drove non-GAAP revenues up to $163 million. We saw a strong growth in recurring revenue, up $30 million in total and up $8 million, or 10% excluding Online Resources. In total, recurring revenue represented 73% of our total revenue during the quarter. Offsetting the strong growth in recurring revenue was the decline in nonrecurring revenue compared to last year, given the timing of certain go-live events and capacity sales year-over-year. The timing of this nonrecurring revenue is expected to be phased later in the year compared to 2012. Online Resources contributed $9 million in revenue for the 20 days under ACI ownership, and the deferred revenue adjustment that impacted our results this quarter was around $1 million. The operating expense growth compared to the prior year quarter was primarily related to full quarter of S1 versus a partial quarter in 2012. Additionally, Online Resources contributed $8 million in operating expense in the period between March 11 and March 31, as well as approximately $7 million in onetime expenses. We ended the quarter with $112 million in cash. And as you -- probably already mentioned in our year-end earnings call, we expected the December 31, 2012 receivable balance to essentially represent a high watermark for us, and we are expecting to see that decline in 2013. We made significant progress towards that effort here in Q1. We were able to reduce our billed and unbilled receivable balance by $35 million during the quarter, and that -- excluding the addition from Online Resources. Our total debt outstanding grew by $300 million due to the Online Resources transaction in the end of the quarter, with $671 million of debt outstanding. And lastly here, we acquired one of our Latin American distributors during the quarter for $14 million. Turning next to Slide 8. We are reaffirming our full year organic guidance, and we expect the partial year addition of Online Resources to contribute between $128 million and $132 million in non-GAAP revenue, which increases our total guidance for the year to $895 million to $915 million in revenue. The acquisition will contribute roughly $19 million to $21 million in non-GAAP operating income, bringing our total 2013 guidance to $170 million to $180 million. And lastly, we expect Online Resources to add between $35 million and $37 million in adjusted EBITDA, increasing our total adjusted EBITDA guidance for the year to now be in the range of $266 million to $276 million. These estimates include the benefit of the previously mentioned $12 million in cost synergies that we expect realize here in 2013. And also as a note here, the guidance excludes an estimated $6 million in deferred revenue adjustments and roughly $14 million in onetime transaction and integration expenses that we expect to incur. And these are also based on preliminary estimates, the purchase accounting adjustments, including the intangible valuation and the deferred revenue haircut, which we expect to finalize here over the coming quarters. And finally, regarding our guidance. To help in your quarterly modeling, I'd like to provide incremental commentary on the seasonality in our business and the additional phasing guidance we're introducing. For 2013, we expect revenues in the first half to represent roughly 41% to 42% of our consolidated full year guidance. And as most of you know, Q4 is traditionally our strongest quarter as new contracts are consummated at year end. In addition, project go-live events, which trigger revenue recognition are also timed to finalize in the second half of the year. Even our incremental capacity sales tend to be back-end loaded. These factors combine to produce a heavy seasonality in our business, and our bottom line seasonality is even more pronounced. We expense the majority of our project work we are doing as incurred, while deferring the recognition of revenue until the go-live event. So when we harvest this revenue in the second half of the year, this high margin flows to the bottom line. And while there always will be a volatility in the timing of our nonrecurring revenue stream, visibility into our pipeline and implementation schedule provides us with a picture of how we look for the year. While this year's 41% to 42% is slightly below our historical first half averages, our visibility provides us confidence with our full year guidance. And finally, we continue to expect organic new sales bookings growth to be in the high-single digits to low-double digits for the year. And that concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.

[Operator Instructions] Your first question comes from the line of Gil Luria, Wedbush Securities.

I'll ask both -- a 2-part question then. First of all, on the Universal Payments Platform, this is something you've been working on for a long time and it's great to see it come out to the market. Do you expect the main impact to be being able to break down into -- to break into new banks that you haven't worked with before with a comprehensive offering? Or is this going to be more a situation where you're able to expand what you have at your existing customers much more broadly and connect it in a way that adds more value to them? And then the second part of the question, to Scott, you're very -- you laid out a very helpful set of numbers on Page 8 of the PowerPoint in terms of the Online Resources' impact. But if you wouldn't mind giving us the pro forma annualized results for Online Resources as a business without the deferred haircut and without the synergies, what you'd expect from them to do in a full year in terms of revenue and EBITDA?

Sure. Okay, Gil. I'll start. The actual great thing about Universal Payments Platform is that it's going to do 2 things. It's one, going to allow us to cross-sell our large contingent, the very large banks and we've gotten some very, very positive feedback as it relates to that. And so actually going to also help them migrate from older and older generations of their payments infrastructure and allow for a lot less risk in terms of them doing it. And we learned a lot through the sunsetting a classic in that regard. And then the other side of it is, is that this allows for a fairly large number of what we would call good-sized but not megabanks to use our technology in a more straightforward and integrated manner. And we've already seen influence in our pipeline on both of these. Scott?

Yes. In terms of the kind of an annualized contribution for Online Resources, we'd expect revenue to be in the range of $160 million to $165 million on an annual basis for this year. And after we take into consideration the synergy actions, our expectation is to be able to get their business to our healthier operating margin to 20% EBITDA margin to 30%.

Your next question comes from the line of George Sutton, Craig-Hallum.

Phil, I wanted to follow up on the UPP platform and better understand exactly what kind of feedback you did get at these conferences. And my sense has been sort of to your cross-sell point that you are not planning to sell this UPP platform to non-ACI customers. In other words, it's sort of part of the benefit of being an ACI customer. And I just want to make sure I was correct in that, and then I have a follow-up.

Yes. I mean, the way we're envisioning UPP is much more like I think one of our board members said, "the java machine." We're going to make this capability available to our customers and new customers. And so we're basically -- we charge on 3 levels. We charge for maintenance and license and capacity. As we move capacity up, we will move capacity up into the UPP level and our ability to provide them the hubbing and buffing and whatnot they need to integrate their infrastructure. We will attach to our current customer base, a new customer base, all their payment products, but we will only charge for the capacity that goes through UPP, whether it's ours or other products. Does that answer your question, George?

It does. I'm curious sort of the -- any specificity you could give us relative to feedback you got...

Oh, yes. I actually went over. We did our Europe, Middle East and Africa users conference last week. And we actually -- we kind of -- we unveiled it for that customer base. And we had demos in the back, and I deliberately sat in the back of the room versus the front of it, front of the room, and I observed. And 2 things that made me feel good was that we were standing room only. And when you have these things in Barcelona, wherever, if you get 75% of your customers to sit through the sessions, you're happy. But to see it as full as it was, was great. And then once it was over, we then said that we would do demonstrations. And the amount of interest required more capacity than we have to be able to present it. And the other thing that was really good about it was, it not only lit up our customers in a really positive way. But I thought the impact on our people was very positive. So I think a lot of people thought, "Wow. This slide, whatever." But when they actually got to start playing with it -- because we actually came out with the most recent release of UPP in the quarter itself. So we actually had a very positive -- we're on schedule in terms of our ability to provide it in the marketplace. So it was really exciting to see them take this horizontal view of our capabilities.

Separately on the billers side, you launched this -- a mobile solution which may sound like a niche product. But given that you've recently purchased ORCC, I'm curious of the feedback that you got on that as well.

Well, that's been very positive. Our business with the retailers is getting bigger and bigger, right? We've always had a nice piece of business. But I think every retailer in the world realizes 2 things: One is, there's a big opportunity that's created by Durbin that's largely sitting with the acquirers not with the retailers at this point. And the second one is, that Apple has proven to everybody that the real shopping experience and whatnot is not queuing up the cash registers, but bringing the register to the customer. And a lot of our customers, we can't tell you their names, but we've got some of the finest retailers in the globe that are very actively connecting their mobile capabilities with their own online capabilities with their payment capabilities. So our strategy in that regard is working well also.

Your next question comes from the line of Tom McCrohan, Janney.

Look like it was very strong this quarter year-over-year. Is there anything specific going on in that area you can share with us?

Yes. Tom, the first part of your question just got cut off. Can you repeat it?

Sorry. Yes. The 3 channels broken out in sales bookings, and Asia Pacific looked extremely strong this quarter. I'm wondering if there's anything specific going on in that market.

Yes. I think a couple of things are happening. One is, is that the opportunity in Asia is very significant and growing. And I think our new -- we're very, very pleased with Paul Hennigan [ph], our new leader of that area. We expect good growth from -- we expect continuing good growth from Asia.

Great. In terms of go-live events and implementations in the queue, can you just give us a sense of how many material implementations are on the way right now? And in terms of guidance for the full year, what you're assuming in terms of number of go-live events that will occur this year?

Well, it's a good question in terms of the number. I mean, it's not inconsistent with number of projects we've had in the past. And if you think about average sizing, we've got small projects and we have large projects. And what we've got in our backlog is essentially the sum -- the total of the efforts that we're expecting to complete here this year.

So let me give you a little more detail. I think, Scott, we have close to 400 projects running at any time. That's probably the best way to think about it. They do range from elephants and whales down to minor -- somewhat more minor fixes and whatnot. It's really clear from our first quarter revenue results that we do not have a lot of go-lives in the first quarter. We tend to have 60%, 70% of the go-lives in the second half of the year. And on a percentage completion standpoint, that tends to be ratable. Probably a good half of those projects are percent complete and they're ratable throughout the year. Unfortunately, the first half of the year is shorter than the second half of the year as it relates to that. And quite honestly, getting started once the banks come off their freezes and whatnot is also slower than the second half of the year. So it's still in the 400 kind of range, small to large. And we've got elephants and whales in there and we've got a lot of ratable work in there also. Does that answer your question?

Yes, it does. And just one follow-up on that. I remember, the last year, I think you talked about First Data that's converting or migrating to your platforms. Is that kind of in the queue? Is that already live? Just give us a status update on that. That would be great.

No, no. First Data is a very large customer of ours. I think we've told you none of our customers are really more than 3% of our business. But they're a large customer of ours. They do not have a -- we have a significant business with them, but we don't have big go-live events. Our big go-live events, we've got a couple in Asia, we've got a couple in Europe and whatnot that are very large go-live events that will happen later on in the year.

Your next question comes from the line of Brett Huff, Stephens Inc.

The first half, second half guidance. That's helpful. We appreciate that insight. A question on ORCC. Scott, you mentioned the full year expectation or the annualized expectations you have for ORCC, and they were a little more robust than we sort of thought might happen. What's the confidence there? Sort of what factors are driving that?

Well, from a confidence perspective, the bulk of that revenue is essentially all recurring. And essentially, it's in backlog at the start of the year. So from a confidence perspective, we're highly confident in that. But the growth drivers in that business are primarily the high growth of the -- biller direct business, the high teens revenue growth offset by a bit of a decline in the banking business. But consistent with what we did with S1, our expectations to able to stabilize that banking business and grow it as we exit the year. But in terms of confidence on 2013, the bulk of that's already in backlog.

Yes. I mean, I don't know if you want to give him the number, Scott, but the monthly recurring revenues going into next year is going to be an impressively high number, right?

Yes. So whereas if you look at 2012, for example, the S1 acquisition brought with it less recurring revenue than our historical experience. ORCC conversely brings a very high, almost essentially all the recurring revenue business. And so as that revenue gets into our run rate, our recurring revenue stream will grow obviously on a dollar basis, but also will continue to grow as a percentage of our total revenue. This quarter, we're 73%, but it only included 20 days of the Online Resources business. So obviously, as that gets into the full quarter, it will have a heavier weighting on our predictability in our recurring revenue stream.

And going back to a question that George asked. One of the first big customers of UPP is going to be ACI themself in terms of bringing together the community bank systems in a logical fashion. That's going to allow us to give a lot more future function to those customers, but it's also going to allow us to improve the margins with those businesses significantly. So we're going to get real marginal improvement, and we've already seen a reduction in attrition now that it's a healthy owner versus a questionable owner, as well as integrating it with the piece that we had acquired in the S1 side. So there's real marginal improvement on the expense side of that piece of business. And that allows us to have a fairly good investment in the direct biller side of the business. And the beauty of this acquisition is that neither one of them really, except for one product that we're going to globalize, which is the...

Virtual collection.

Virtual collection agent. It really -- it doesn't -- we don't freeze frame the rest of the organization the way we had to with S1 in terms of integrating the distributions and whatnot. This clearly stays to the community side with the addition of the direct -- or the addition of the direct biller as something we own versus something we buy from 4 or 5 other people as we did in the past.

And -- that's helpful. And then one quick follow-up on the ORCC kind of from a bigger picture point of view. Is the rationale for ORCC that we think near term that we can cross-sell some of the products, the Internet banking and the bank-based Bill Pay to our bank customers? Or is it more of a longer term, we want to change the dynamic of how Bill Pay is sold from maybe a per tran basis to more of the way you guys sell your BASE24 system, the 5-year term license, and change the economics for the larger banks on that?

Well, believe it or not, the lesser opportunity is actually cross-selling it against our current small bank environment and whatnot. The larger opportunity is to take something that's a $0.04 to $0.06 transaction to our major banks that they're buying elsewhere and to bring it to a sub-$0.01 kind of transaction. So it's an IP play. It's a play to give them -- to give our big banks the ability to do bill payment on a much more efficient basis and, therefore, grow the category, right? And, therefore, we sell more -- our motive is to sell a lot more capacity.

[Operator Instructions] Our next question comes from the line of Wayne Johnson, Raymond James. Wayne Johnson - Raymond James & Associates, Inc., Research Division: You called out Asia Pacific and reported Asia Pacific as a strong geography. In the past, we've talked a little bit about the opportunities in Japan and China. Can you -- is any of these revenues that are being recognized, is that a sign that you guys are doing better in those 2 countries in particular? And I have a follow-up after that.

Okay, Wayne. I would tell you that China, we're actively working in China and it's about 100 and some percent investment. I mean, we're doing a lot of work there. We're getting good traction. But no, it's not -- it would not be viewed -- it would be on the investment side of the ledger, not the earnings side. I would say that Japan, we are doing very well on some projects, and we're at the dawn of that being potentially a significant contributor. As a matter of fact, tomorrow night or Saturday morning, I'm headed off to Japan to see the big banks personally. And so we have big expectations. And a little bit of our positive results in Asia is a very successful project going pretty well along in Japan at this point. But the vast majority in Japan is still in front of us, to be honest. Wayne Johnson - Raymond James & Associates, Inc., Research Division: And is part of that opportunity UPP?

Very much so in terms of UPP. As a matter of fact, some of the more creative uses of UPP are coming from our customers. And there's a Japanese concept. It's not booked or anything that's really very, very interesting in terms of how the Japanese banks can improve the yield on their wholesale side of their business in terms of how they do wholesale payments. So yes, UPP is very present in Japan. Wayne Johnson - Raymond James & Associates, Inc., Research Division: Any positives or negatives to call out on the continent of Europe?

Well, on the continent of Europe, Europe is not having the easiest economic times. Most of our selling at this point is coming from the productivity that we're producing. There was a wonderful article that was put out that -- or referenced I think the IBS article that talked about UPP and our history. Really talked about the transformational work we're doing in France, and one of the banks was speaking about that. So I think we're viewed as someone who can really help them from a productivity standpoint. We're not getting a lot of sales because people are seeing huge growth or anything. It's that there's a lot of acquisitions going on, there's a lot of integrations and they're looking to get the improvement from that. Now if I were to take the Middle East portion of that, we've done extremely well in the Middle East. And now that we have a complete set of payment offerings, we're beginning to see very good cross-sell in the Middle East side of the business. And Africa is a slow -- we're doing as well or a little better than the growth rate from the continent. But it's profitable for us, and we expect, at some point, it's going to be a bigger contributor. But right now, that's a good steady, good -- steady as she goes kind of business. So we're seeing most of our growth in Europe and the Middle East. And we're beginning to see the Eastern European businesses largely integrating those banks into their Western -- or more Western owners. So I would really lump Eastern Europe and Western Europe together at this point.

There are no further questions. I'll turn the call back to our presenters for closing remarks.

Well, thank you, all, for joining us. We look forward to speaking with you in the coming weeks.